Some mortgage lenders will not place a mortgage on certain homes because they have, for example, asbestos, vermiculite, UFFI (urea formaldehyde foam insulation), knob & tube wiring, 60 amp electrical services, galvanized / cast / PEX plumbing pipes, structural issues, mould, marijuana grow-op or that are illegal duplexes / triplexes to mention but a few. So it begs the questions, how do lenders know: What’s in the house? What condition is the house in?

Mortgage lenders can certainly ask a homebuyer for any information that they might be aware of, something might grab the lender’s attention in the Offer to Purchase perhaps, the real estate appraiser might make them aware of something, maybe the realtor, a lawyer, a party to the deal or simply a friend of a friend offered up some information. Naturally, a good source of information in this regard can come from a home inspection report. However, in today’s hot real estate market where there are multiple offers and the “best” offer is accepted by the seller that may not only have the highest price, but that is the cleanest in terms of conditions…which typically can mean, no financing and or home inspection conditions. This can create issues then when a lender does their due diligence:

• The homebuyer may say that they are unaware of those key “lending requirement” triggers in the home because they believe it to be true, but have not verified it…or simply don’t know any better.
• The real estate appraiser typically does not verify these items. For example, they rarely if ever would go into an attic space to find vermiculite or grow-op issues, they don’t take the electrical panel off to confirm the electrical service size and or they are not trained to identify many of the other items noted above. In any event, they don’t typically spend that type of time at the home looking for those items specifically, in part because they may not impact market value. The appraiser does not review the home inspector’s report to see how it might impact value.
• Some lenders may feel that if homeowners can get insurance then the insurer must have checked matters out as they too won’t insure home’s with certain items present. However, insurance brokers / agents rarely if ever visit the property prior to placing coverage relying ostensibly on client information.

So, what happens if the lender becomes aware that these items are present e.g. at renewal time? The homeowner will likely be faced with remedying these items or finding another lender willing to take on the home. On the other hand, maybe they’re ready to sell their home when these items are discovered and the new homebuyer can’t get a mortgage leaving them, stuck with the house or having to drop their price. Of course, had they known of this when they bought their home they would have ensured the price they were paying for the house reflected this or would have renegotiated the price from the get go.

What if you have to make a claim on your insurance and these items are there? It’s quite conceivable they’ll be asked to remedy them straight away in order maintain their insurance. If they have a claim as a result of one of those items, they will likely be denied coverage because there simply isn’t coverage or due to the fact that they failed to disclose a material fact. This can cause premiums to go up on renewal, or simply that they will not get their homeowner’s insurance policy renewed.

One last thing…so, a homebuyer’s income meets the lender’s requirements for repayment, the appraisal on the property came in at the right value (based on its current condition) and they meet all the other lending requirements. So what happens if the house needs $50,000 worth of work that has not been identified by anyone, for example, to remediate the asbestos, replace the furnace and air conditioner, the roof, etc. What then? Mortgage lenders might ask themselves these questions…

• As part of our due diligence / risk management, what definitive answers do we need proof of before lending?
• Should we simply recommend or insist upon clients that they have a home inspection carried out to protect them not only upfront but down the line too?
• Are we acting in our clients best interests?
• Are we missing an opportunity for Purchase Plus Improvements?
• By having clients get an inspection will it strengthen our client relationship & make “client’s for life”?
• How can we help our mortgage clients and stand out above the rest?